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Source text - EnglishYet widening interest-rate differentials have regularly lent support to the dollar in 2005, and show no immediate sign of letting up. These rates matter because global banks, hedge funds and other investors generally prefer to park their money in higher-yielding securities. The larger the difference in yields between Treasury bills and, say, German or French debt, the greater the incentive for investors to hold their cash in dollars.

"I think the dollar is tracking U.S. interest rates more closely this year because yields have gotten attractive enough to get noticed by investors outside the U.S.," says Rebecca Patterson, a foreign-exchange analyst at J.P. Morgan Chase.

The Fed began planting the seeds of this year's dollar rally in June 2004, when it initiated the tightening cycle with the first of 11 quarter-point rate increases that lifted the benchmark federal-funds rate to 3.75%. Fed watchers expect rates to rise to at least 4.25% and some think 4.5% is more likely.

A few weeks before the Fed began tightening in June 2004, U.S. three-month term rates yielded around 1%, or barely half of the equivalent European rate. With the rate differential still favoring Europe, traders saw little immediate benefit in holding dollars, and broader concerns about the expanding U.S. budget and trade deficits conspired with interest rates to weigh on the dollar, some analyst suggest.